BMO chief defends cheap mortgage offerings; says house prices are poised for a ‘soft landing’

The head of the Bank of Montreal, Bill Downe, says Canadian house prices are poised for a “soft landing” after “unsustainable” rising rates, especially in the big cities. In February, Toronto’s average home price rose 10.6% from the same month last year to $454,470, while in Vancouver, housing prices averaged $806,094, double the national average, a rise of two percent over February 2011.

Defending the bank’s cheap mortgage offerings, which sparked a rate war amongst Canada’s banks, BMO’s chief said it was the soaring household debt levels coupled with longer amortization plans which are causing “risk to borrowers.” That risk has already sparked concerns about a possible bubble in the making.

Downe’s comments back BMO’s strategy to offer lending rates as low as 2.99 percent for 5-year fixed rate mortgages, and 3.99 percent for 10-year fixed rate mortgages carrying a 25-year amortization, announced in a “sale” style earlier in January and March, which are set to expire next Wednesday. Shortly after BMO launched the lowered rates, RBC, TD Canada Trust and CIBC followed suit and matched BMO’s offer, in a clear fight for market share.

Downe’s rationale is that homeowners can build equity faster with shorter amortization plans, “knowing what their monthly payments will be, no matter where interest rates go in the future.”